Fitch downgrades Bank Muscat to 'BB-'; outlook negative
Fitch Ratings has downgraded Bank Muscat SAOG's (BM) Long-Term Issuer Default Rating (IDR) to 'BB-' from 'BB'. The Outlook is Negative. Fitch has also downgraded the bank's Viability Rating (VR) to 'bb-' from ' bb' and revised the Support Rating Floor (SRF) to ' B+' from ' BB-'.
The rating actions follow the downgrade of Oman's sovereign rating on 17 August 2020 to 'BB-' from 'BB' (see Fitch Downgrades Oman to ' BB-'; Outlook Negative at www.fitchratings.com).
As well as the sovereign downgrade, the rating actions on BM incorporate the downside risks to its credit profile resulting from the economic and financial implications of the coronavirus pandemic.
The rating actions reflect the high correlation between the sovereign and BM's credit profile but also that the spread of coronavirus will add to the pressure on the bank's earnings and asset quality amid a domestic operating environment that was already increasingly challenging prior to the outbreak.
Fitch has lowered its operating environment score for Omani banks to 'bb-' (with a negative trend) from 'bb'. GDP fell 1.3% in 2019 with substantially weaker prospects for the next couple of years (2020: -4.9%; 2021: -1.5%), reflecting the financial and economic impact of lockdown measures, lower oil prices and the government's expected continued restrictive fiscal policy.
Support measures implemented by the Central Bank of Oman (CBO) should go some way to counteract the economic impact of the coronavirus and mitigate asset quality erosion at banks. These include deferment payment measures ( typically six months) across retail and corporate borrowers.
Banks will not automatically have to classify loans as impaired if the borrower makes use of payment deferrals, benefiting IFRS 9 impairment ratios. As a result, the extent of asset quality deterioration is likely to take time to emerge. Loan impairment charges in 1H20 averaged 0.9% of loans (annualised) for Fitchrated banks, with a range of 0.4%- 1.9%, up from an average of 0.4% over the previous four years.
BM's IDRs are driven by its VR. Fitch caps BM's VR at the Oman sovereign rating because of the bank's considerable exposure to sovereign credit risk through sizeable holdings of sovereign/central bank assets, a large proportion of government and public sector exposures on both sides of the balance sheet and the bank's predominantly domestic nature, including a reliance on government spending to drive credit growth.
The downgrades of the Long- Term IDR and VR are therefore a consequence of the sovereign downgrade, which also contributed to Fitch revising down Oman's operating environment score to 'bb-', which has a high influence on the bank's VR and hence Long-Term IDR.